Michael Hartnett, Bank of America’s chief investment strategist, is flagging a trade most of Wall Street isn’t thinking about: buying bonds. His thesis hinges on a political scenario that prediction markets are starting to take seriously, a Democratic sweep in the November 2026 midterms that could upend the current risk-on consensus and make Treasuries the surprise winner of the fourth quarter.
The market’s default assumption right now is that Democrats won’t take control. Hartnett thinks that complacency is creating a setup where bonds become an asymmetric bet if the political winds shift.
The ABB problem and why bonds look interesting again
Hartnett has long operated under what he calls the “Anything But Bonds” framework. The logic has been straightforward: with US debt approaching $40 trillion and annual interest payments running between $1.4 trillion and $1.5 trillion, Treasuries have been the asset class nobody wanted to own.
Thirty-year Treasury yields are currently sitting near two-decade highs. Treasury Secretary Bessent has set a target to bring 30-year yields below 5%, but getting there requires either a meaningful economic slowdown or a political catalyst that reshapes fiscal expectations.
Hartnett thinks a Democratic midterm sweep could be that catalyst. His current positioning remains long equities and short bonds, but he’s carving out a tactical exception: if Democrats look poised to gain control of both chambers, bonds suddenly become the contrarian play worth making.
The reasoning works like this. A Democratic sweep would likely signal a policy pivot away from what Hartnett describes as “populist capitalism” toward a framework more focused on redistribution and affordability. That shift would introduce enough uncertainty to trigger risk-off behavior across equity markets, pushing capital toward the relative safety of fixed income.
What a Democratic sweep actually means for markets
Hartnett’s analysis suggests a Democratic Senate win alone could drive equities down more than 10%. For context, a 10% drawdown in the S&P 500 from current levels would wipe out trillions in market capitalization and likely force institutional investors to rapidly rebalance portfolios.
Much of the current equity rally, particularly in AI-related stocks, has been built on assumptions about deregulation and business-friendly policy continuity. A Republican hold in Congress reinforces those assumptions and keeps the AI trade alive. A Democratic sweep threatens it.
A weaker US dollar would likely accompany this shift as well, creating a trifecta of falling stocks, falling yields, and a softer greenback.
Prediction markets are paying attention
Prediction markets, including Polymarket, are currently pricing the odds of a Democratic sweep at roughly 45-50%. That’s a coin flip, not a long shot.
Midterm elections have historically been associated with elevated market volatility regardless of which party gains ground. Beyond bonds, Hartnett has expressed confidence in commodities and gold as hedges against the political uncertainty and potential fiscal policy shifts that a Democratic sweep would bring.